Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, PUNE BENCH “B”, PUNE
आदेश / ORDER
PER SUSHMA CHOWLA, JM:
The appeal filed by assessee is against order of CIT(A)-1, Nashik, dated 23.06.2016 relating to assessment year 2010-11 against order passed under section 143(3) r.w.s. 147 of the Income-tax Act, 1961 (in short ‘the Act’).
The assessee has raised the following grounds of appeal:- On facts and in law, 1] The reasst. u/s 147 be held bad in law as reopening is based on the decision of CIT(A) in the case of Zetex Engineers Pvt. Ltd. and which is not accepted by the dept.
ITA No.1992/PUN/2016 2 Shri Ravi Pichaya
2] The learned CIT(A) erred in confirming the addition of Rs.1,41,34,381/- as deemed dividend in the hands of the appellant on the ground that Hextech Engineering Pvt. Ltd. (Hextech) had given a loan to Zetex Engineers Pvt. Ltd. (Zetex) and the appellant is a common shareholder in both the companies with more than 90% shareholding. 3] The learned CIT(A) was not justified in taxing the above amount of Rs.1,41,34,381/- as deemed dividend in the hands of the appellant as the funds given by Hextech to Zetex were for the purposes of its business and not as a loan and therefore, the question of taxing any deemed dividend on account of these transactions simply did not arise u/s 2(22)(e). 4] Without prejudice, the learned CIT(A) erred in sustaining the addition of Rs.1,41,31,384/- while it should have been restricted only to the peak amount arising out of the loans given during the F.Y. 2009 - 10 and not out of the transactions in the past years and secondly, it should have been restricted only to the incremental increase in accumulated profits after deducting the deemed dividend for the earlier years as per the provisions of the Act. 5] Without prejudice, the appellant submits that deemed dividend if any, could be taxed in his hands only in proportion of his shareholding to the total shareholding of Hextech of the accumulated profits of the company and not to the extent of the entire accumulated profits of the company. 6] The learned CIT(A) erred in confirming interest charged u/s 234A / 234B / 234C as charged by the A.O.
The assessee has raised an additional ground of appeal against reopening of assessment under section 148 of the Act. The additional ground of appeal reads as under:- 1] The assessee submits that notice of reopening u/s. 148 dated 04.09.2013 is invalid in law since at that point of time, the addition on account of deemed dividend was already made in the case of Zetex Engineers Pvt. Ltd. and therefore, there was no reason to believe that the income on account of deemed dividend had escaped addition in the hands of assessee.
The learned Authorized Representative for the assessee prayed that the additional ground of appeal raised by the assessee be admitted as it goes to the root of the jurisdiction invoked by the Assessing Officer and is purely legal issue. In view of issue being legal raised against reopening of assessment by issue of notice under section 148 of the Act, we admit the said additional ground of appeal and proceed to decided the said issue before referring to the issues raised on merits.
ITA No.1992/PUN/2016 3 Shri Ravi Pichaya
Briefly, in the facts of the case, the assessee had furnished return of income on 05.10.2010 declaring total income of ₹ 53,37,829/-. The said return was processed on 22.02.2013 under section 143(1) of the Act. The Assessing Officer on verification of records available noted that the assessee was Director in M/s. Hextech Engineers India Pvt. Ltd. (in short ‘Hextech’) and was holding 97.10% of shares in the said company. He was also shareholder of M/s. Zetex Engineers Pvt. Ltd. (in short ‘Zetex’) holding 99.95% shares of the company. Hextech had given loan of ₹ 1.41 crores to Zetex. Since the assessee was common shareholder with more than 90% of shareholding in both the companies, hence loan taken by Zetex from Hextech was considered as deemed dividend under the purview of section 2(22)(e) of the Act. The Assessing Officer also noted some variation in the receipts, which were reflected in 26AS statement and declared by the assessee. However, we are not concerned with the said issue as no ground of appeal is raised against such addition before us. The Assessing Officer on the basis of aforesaid information, was of the view that there was failure on the part of assessee to disclose fully and truly all material facts necessary for assessment for the year under consideration and he was of the view that there was escapement of assessment within meaning of section 147 of the Act. The Assessing Officer thus, recorded reasons for reopening the assessment and issued notice under section 148 of the Act to the assessee on 04.09.2013. In response thereto, the assessee vide letter dated 20.09.2013 requested that original return of income filed by him on 05.10.2010 be considered as return of income filed in response to notice issued under section 148 of the Act. Thereafter, assessment was taken up by issue of notice under section 143(2) of the Act. The Assessing Officer in final had made addition on account of deemed dividend under section
ITA No.1992/PUN/2016 4 Shri Ravi Pichaya
2(22)(e) of the Act at ₹ 1.41 crores and no other addition was made in the hands of assessee.
In appeal, the CIT(A) upheld the addition made by invoking provisions of section 2(22)(e) of the Act.
The assessee before us by way of additional ground of appeal has challenged the jurisdiction of Assessing Officer to start the reopening proceedings and issue notice under section 148 of the Act on 04.09.2013. The stand of assessee is that on the date when the said notice under section 148 of the Act was issued, the addition on account of deemed dividend was already made in the case of Zetex and therefore, there was no belief that income on account of deemed dividend had escaped assessment in the hands of assessee. The learned Authorized Representative for the assessee in this regard pointed out that copy of notice issued under section 148 of the Act is placed at page 1 of Paper Book and the same is dated 04.09.2013. He then referred to letter dated 26.09.2013 vide which reasons recorded for issuance of notice under section 148 of the Act were provided to the assessee. After going through reasons, he pointed out that sole basis was the loan advanced by Hextech to Zetex and since the assessee was major shareholder in both the concerns, hence, it was case of deemed dividend under section 2(22)(e) of the Act. The second reason was in respect of Form No.26AS payments and the payments declared are also mentioned in the said letter but the same has no relevance. The learned Authorized Representative for the assessee then, referred to assessment order passed in the case of Zetex under section 143(3) of the Act, relating to assessment year 2010-11, dated 20.12.2012. The learned Authorized Representative for the assessee pointed out that the factum
ITA No.1992/PUN/2016 5 Shri Ravi Pichaya
of loan received from Hextech by Zetex was considered at length in the assessment order and addition under section 2(22)(e) of the Act was made at ₹ 25,49,919/- i.e. to the extent of profits available as per section. He further drew our attention to the assessment order passed under section 143(3) r.w.s. 147 of the Act and 143(3) of the Act, relating to assessment years 2008-09 and 2009-10, which are placed at pages 6 to 19 of Paper Book, wherein also addition under section 2(22)(e) of the Act was made to the extent of profits available. He then referred to the order of CIT(A), which is placed at pages 27 to 44 of Paper Book for the respective assessment years i.e. 2008-09 to 2010- 11 and vide order dated 05.02.2014 for assessment year 2010-11, the CIT(A) deletes the addition in the hands of Zetex. However, it directs that addition needs to be made in the hands of Shri Ravi Pichaya, the substantial shareholder i.e. assessee before us. The learned Authorized Representative for the assessee then referred to order of Tribunal dismissing the appeal of Revenue because of low tax effect, which is for assessment year 2010-11, dated 23.12.2015. With regard to assessment years 2008-09 and 2009-10, he pointed out that the CIT(A) deleted addition in the hands of Zetex vide individual orders dated 22.05.2012. On 21.11.2013, the Tribunal dismissed the appeal of Revenue which was challenged by Revenue before the Hon’ble High Court. The Hon’ble Bombay High Court on 27.01.2017 dismissed the appeal of Revenue for low tax effect. The learned Authorized Representative for the assessee then pointed out that re-assessment proceedings in the hands of assessee starts on 04.09.2013 i.e. the date on which addition was already made in the hands of Zetex. He stressed that as on 04.09.2013, since the amount was already taxed in the hands of Zetex and where the Revenue was pursuing the appeals before the Tribunal, even thereafter, so as on 04.09.2013, it could not be said that there was reason to believe of escapement of
ITA No.1992/PUN/2016 6 Shri Ravi Pichaya
assessment in the hands of assessee. When the Revenue further challenges the order of Tribunal in the case of Zetex on 21.11.2013 before the Hon’ble High Court, it could not be said that there was any reason to belief of escapement of income as on that date. In this regard, he placed reliance on the ratio laid down by the Hon’ble Bombay High Court in DHFL Venture Capital Fund Vs. ITO (2013) 34 taxmann.com 300 (Bom) and strictly on without prejudice basis, the learned Authorized Representative for the assessee stressed that addition, if any, in the hands of assessee had to be restricted to ₹ 25 lakhs only i.e. profits available.
The learned Departmental Representative for the Revenue relying on the orders of authorities below pointed out that the Assessing Officer on account of relevant law independently came to the view that income had escaped assessment and for that reason, recorded reasons for reopening the assessment and issued notice under section 148 of the Act.
We have heard the rival contentions and perused the record. The assessee vide additional ground of appeal has challenged the maintainability of re-assessment proceedings on the ground that at the relevant time when notice under section 148 of the Act was issued to the assessee, it could not be said that there was reason to believe of escapement of income in the hands of assessee, since the amount in question had already been taxed in the hands of concern Zetex, which had taken the loan from Hextech. The assessee was major shareholder in Hextech, which had advanced sum of ₹ 1.41 crores to Zetex in which also the assessee had major shareholding. The assessee had filed its return of income within due date of filing the same under section 139(1) of the Act i.e. on 05.09.2010, declaring total income of ₹ 53,37,829/-, the said
ITA No.1992/PUN/2016 7 Shri Ravi Pichaya
return of income was processed under section 143(1) of the Act on 22.02.2013. The Assessing Officer for the first time issued notice under section 148 of the Act to the assessee on 04.09.2013. In response to the said notice, the assessee replied that original return of income may be treated as filed in response to the said notice under section 148 of the Act. Thereafter, the assessee sought reasons for reopening the assessment and it transpired that the sole reason for reopening the assessment was the assessability of deemed dividend in the hands of assessee within purview of section 2(22)(e) of the Act.
Without going into merits of applicability of said section, the issue which has been raised before us is whether at the relevant time, when the Assessing Officer recorded reasons for reopening the assessment and issued notice under section 148 of the Act, did the Assessing Officer In-charge of assessment of assessee have jurisdiction to issue the aforesaid notice? For adjudicating the same, it is necessary to take into consideration the assessment proceedings which were going on in the hands of Zetex for assessment years 2008-09 to 2010-11 i.e. years in which Zetex had taken loan from Hextech. The copy of assessment order passed under section 143(3) r.w.s. 147 for assessment year 2008-09, dated 22.11.2011 is placed at pages 6 to 12 of Paper Book. The Assessing Officer In-charge of assessment proceedings of Zetex had noted that there were financial transactions between Hextech and Zetex and the said transactions were hit by provisions of section 2(22)(e) of the Act. Hence, after recording reasons, notice under section 148 of the Act was issued to Zetex on 24.02.2011. Consequent to assessment proceedings in assessment year 2008-09, in view of accumulated profits of Hextech as on 31.03.2008 being ₹ 63,05,624/-, addition was made of the same as deemed dividend in the hands of assessee. It may be noted that the
ITA No.1992/PUN/2016 8 Shri Ravi Pichaya
Assessing Officer vide para 7 had clearly verified the number and percentage of shareholding of both Hextech and Zetex and had noted that the assessee Shri Ravi Pichaya had shareholding of 97.10% in Hextech and 99.95% in Zetex as against peak debit balance of ₹ 1.37 crores, addition was made to the extent of ₹ 63,05,620/- vide order dated 22.12.2011. Similarly, for assessment year 2009-10, order was passed under section 143(3) of the Act, wherein loan transaction between Hextech and Zetex to the extent of ₹ 99,00,247/- was taken note of and also the shareholding of both the concerns were noted and the question was the addition of deemed dividend under purview of section 2(22)(e) of the Act. The Assessing Officer at page 4 clearly notes the shareholding of assessee in both the concerns but comes to a finding that addition to the extent of ₹ 58,71,515/- i.e. accumulated profits of Hextech was to be treated as deemed dividend in the hands of Zetex for assessment year 2009-10. The said order was passed on 27.12.2011. Thereafter, assessment proceedings for assessment year 2010-11 were taken up under section 143(3) of the Act and the copy of said order is placed at pages 20 to 25 of Paper Book and similar deliberations were made by the Assessing Officer In-charge of assessment proceedings of Zetex, after noting the loan transaction, shareholding of Shri Ravi Pichaya, the addition was made on account of deemed dividend under section 2(22)(e) of the Act at ₹ 25,49,919/- in the hands of Zetex. The appellate proceedings for assessment years 2008-09 and 2009- 10 vide separate orders were adjudicated by the CIT(A) in the case of Zetex and addition was deleted on the ground that loan taken by assessee was interest bearing loan and not hit by provisions of section 2(22)(e) of the Act. The copies of said orders are placed at pages 27 to 32 of Paper Book. Thereafter, on 05.02.2014, the CIT(A) decided the appeal of Zetex relating to assessment year 2010-11 and it takes note of the decision of Tribunal in ITA
ITA No.1992/PUN/2016 9 Shri Ravi Pichaya
Nos.1570 & 1571/PN/2012, relating to assessment years 2008-09 and 2009- 10, decided on 21.11.2013, by which the Tribunal had upheld the order of CIT(A) in holding that no payment as contemplated under section 2(22)(e) of the Act had been made by closely held assessee company, since the loan taken by Zetex was interest bearing sum, was not hit by section 2(22)(e) of the Act. The CIT(A) at page 9 applies the said findings of Tribunal in the case of Zetex and addition of ₹ 25,49,919/- made on account of deemed dividend under section 2(22)(e) of the Act was deleted. He further goes on to say that Shri Ravi Pichaya i.e. assessee before us was substantial shareholder in both the companies and the deemed dividend was required to be taxed in his hands as per provisions of the Act. He then holds that since the addition has been deleted in assessment years 2008-09 and 2009-10, then accumulated profits to the extent of ₹ 1.47 crores were available in the books of Hextech as on 31.03.2010 and he was of the view that deemed dividend to the extent of ₹ 1.47 crores was to be taxed in the hands of Shri Ravi Pichaya, substantial shareholder. The said order is dated 05.02.2014.
Another point which may be noted that the said appeal of Revenue against the order of CIT(A) has been dismissed because of low tax effect by the Tribunal in ITA No.775/PN/2014, relating to assessment year 2010-11, vide order dated 23.12.2015. The Revenue had also challenged the order of Tribunal dated 21.11.2013 relating to assessment years 2008-09 and 2009-10 before the Hon’ble Bombay High Court, which vide its order dated 27.01.2017 had dismissed the appeal for low tax effect.
Now, coming to re-assessment proceedings which started against the assessee on 04.09.2013 i.e. date on which reasons were recorded for
ITA No.1992/PUN/2016 10 Shri Ravi Pichaya
reopening the assessment. The status of said loan taken by Zetex from Hextech as on the date of recording reasons for reopening the assessment in the hands of assessee on the ground that the assessee was major shareholder in both the concerns and hence, provisions of section 2(22)(e) of the Act were attracted, was on a date when already on account of said loan transaction between Zetex and Hextech, addition was made in the hands of Zetex for which demand was raised and against the order of CIT(A), Revenue was pursuing appeal before the Tribunal. Thereafter, as pointed out above, the order of CIT(A) is dated 22.05.2012 and the appeal of Revenue was dismissed by the Tribunal for assessment years 2008-09 and 2009-10 on 21.11.2013, against which the Revenue filed appeal before the Hon’ble Bombay High Court and the Hon’ble High Court had decided the same on 27.01.2017. For assessment year 2010-11 i.e. relevant assessment year, the addition was made in the hands of Zetex vide order passed on 22.12.2012 and that addition was sustaining as on 04.09.2013, i.e. date on which re-assessment proceedings were initiated against Shri Ravi Pichaya. The CIT(A) had deleted addition in the hands of Zetex for assessment year 2010-11 on 05.02.2014 and he has directed the Assessing Officer to take measures of assessing the said income in the hands of Shri Ravi Pichaya, the major shareholder. However, the Assessing Officer before that order of CIT(A), had already initiated re- assessment proceedings on 04.09.2013 and completed the same on 23.03.2015. In such scenario, the question which arises is the date on which reasons were recorded for escapement of income, was there in fact any escapement of income? The transaction was between Hextech and Zetex and on account of aforesaid transaction, addition was already made in the hands of Zetex by an order passed under section 143(3) of the Act. The Assessing Officer while passing that order had clearly noted the shareholding of assessee
ITA No.1992/PUN/2016 11 Shri Ravi Pichaya
in the two concerns and had come to a finding that the provisions of section 2(22)(e) of the Act were attracted in the hands of Zetex and not in the hands of Shri Ravi Pichaya i.e. assessee before us. Hence, we find merit in the plea raised by assessee that where the amount was already taxed in the hands of concern in which the assessee had major shareholding, then on the date when reasons were recorded for reopening the assessment, there was no belief that there was escapement of income. The same transaction and income arising therefrom cannot be taxed in two hands simultaneously. Accordingly, we hold that the Assessing Officer has exceeded his jurisdiction while recording reasons for reopening the assessment in the case of assessee on the ground that in view of loan transaction between Hextech and Zetex and since the assessee was major shareholder, the addition transaction was hit by provisions of section 2(22)(e) of the Act. We find no merit in initiation of re-assessment proceedings in the hands of assessee and we hold that the said initiation was both invalid and bad in law on the relevant date.
The Hon’ble Bombay High Court in DHFL Venture Capital Fund Vs. ITO (supra) had held that jurisdictional requirement for reopening of assessment under section 148 of the Act was the formation of reason to believe by the Assessing Officer that income had escaped assessment and existence of that reason must be in present. The Hon’ble High Court further goes on to hold that recourse to section 148 of the Act cannot be founded in law on a hypothesis of what would be the position in future should an appeal before the appellate authority, being the Tribunal or the High Court, result in a particular outcome. The relevant paras 15 and 16 read as under:- “15. The jurisdictional requirement for reopening an assessment u/s 148 is the formation of a reason to believe by the AO that income has escaped assessment. The formation of the reason to believe and the existence of that reason must be in the present. Recourse can be taken to the provisions of
ITA No.1992/PUN/2016 12 Shri Ravi Pichaya
Section 148 where the AO has a reason in present, meaning thereby, a reason which is present to his mind when he forms his reason to believe, that income has escaped assessment. Recourse to Section 148 cannot be founded in law on a hypothesis of what would be the position in future should an appeal before the appellate authority, being the Tribunal or the High Court, result in a particular outcome. The statute does not contemplate the reopening of an assessment u/s 148 on such a hypothesis or a contingency which may emerge in the future. 16. The basis on which the AO has purported to reopen the assessment is placed beyond any doubt by the affidavit which has been filed in reply to the Petition. There is no ambiguity whatsoever in the reasons which have been communicated to the assessee in the order dated 18 May 2012, but in the affidavit in reply, it has been stated that the income of Rs.32.83 Crores arising from the investment of contributions of the contributors to the Venture Capital Fund which has been claimed as exempt in the hands of the Assessee should be assessed as income in the hands of the AOP of the contributors of the Assessee “on a protective basis”. Again it has been stated that the issue of taxing the AOP of the contributors of the Assessee “has arisen from the submission of the Assessee before the appellate authorities” where the Assessee has contended that the transactions amount to a revocable transfer and that the income which would arise should be taxed in the hands of the individual contributors. The reopening of an assessment u/s 148 on the basis of a submission which is raised before the appellate authority by the assessee is clearly impermissible because what Section 147 requires is a formation of a reason to believe by the AO. In the present case, there is clearly a want of compliance with the jurisdictional condition. The AO has not formed a reason to believe that income has escaped assessment since the reopening is based purely on a contingency that may arise upon a particular outcome before the appellate tribunal.”
The reopening of assessment in the hands of assessee as on 04.09.2013 could not be upheld on the ground that provisions of section 2(22)(e) of the Act may eventually apply to the major shareholder vis-à-vis transaction between two companies in which the assessee is the major shareholder. Eventuality of application of section 2(22)(e) of the Act whether in the hands of Zetex or the assessee simultaneously cannot be taken up i.e. where the addition has already been made in the hands of Zetex by the Assessing Officer concerned and the said addition was challenged before various Forums simultaneously, re-assessment proceedings cannot be initiated in the hands of assessee being the major shareholder. In view of the facts and issue being decided by the Hon’ble Bombay High Court, we find no merit in initiation of re-assessment proceedings by recording reasons for reopening assessment in the hands of assessee as on 04.09.2013 i.e. the date on which
ITA No.1992/PUN/2016 13 Shri Ravi Pichaya
the addition was already made in the hands of recipient of loan, though the assessee was major shareholder of the concern giving loan and concern taking the loan. Hence, the re-assessment order passed under section 143(3) r.w.s. 147 of the Act is annulled. The additional ground of appeal raised by assessee is thus, allowed. Since the jurisdictional issue has been decided, we are not addressing other grounds of appeal raised by assessee.
In the result, the appeal of assessee is allowed.
Order pronounced on this 27th day of March, 2019.
Sd/- Sd/- (ANIL CHATURVEDI) (SUSHMA CHOWLA) ऱेखा सदस्य / ACCOUNTANT MEMBER न्याययक सदस्य / JUDICIAL MEMBER ऩुणे / Pune; ददनाांक Dated : 27th March, 2019. GCVSR आदेश की प्रयतलऱपप अग्रेपषत/Copy of the Order is forwarded to : 1. अऩीऱाथी / The Appellant; 2. प्रत्यथी / The Respondent; 3. आयकर आयुक्त(अऩीऱ) / The CIT(A)-1, Nashik; 4. The Pr.CIT-1, Nashik; ववबागीय प्रतततनधध, आयकर अऩीऱीय अधधकरण, ऩुणे “फी” / DR 5. ‘B’, ITAT, Pune; 6. गार्ड पाईऱ / Guard file. आदेशािुसार/ BY ORDER, सत्यावऩत प्रतत //True Copy// वररष्ठ तनजी सधिव / Sr. Private Secretary आयकर अऩीऱीय अधधकरण ,ऩुणे / ITAT, Pune